2016 DEFENCE INDUSTRY POLICY STATEMENT

TABLE OF CONTENTS

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` Table of Contents

Section 1 – The Defence and Industry Partnership . . . . 5

Australia’s defence industry—our critical partner in success . . . . 5

The purpose of this Defence Industry Policy Statement . . . . 10

The key elements and initiatives of the Defence Industry Policy . . . . 10

Section 2 – Delivering Defence Capability . . . . 15

The Centre for Defence Industry Capability . . . . 15

Leadership and management of the CDIC . . . . 17

Recognising industry as a Fundamental Input to Capability . . . . 19

The new capability development process . . . . 20

The Integrated Investment Program . . . . 22

Securing our sovereign industrial capabilities . . . . 23

Key enablers that support Defence capability . . . . 25

Section 3 – A New Approach to Defence Innovation . . . . 29

The new approach to Defence innovation . . . . 30

Next Generation Technologies Fund—Defence’s strategic research . . . . 31

The Defence Innovation Hub—turning research into capability . . . . 34

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Section 4 – Driving Competitiveness and Export Potential . . . . 43

Role of the CDIC . . . . 44

The importance of industry skilling and STEM—Science, Technology, Engineering and Mathematics . . . . 46

A stronger Australian Industry Capability Program . . . . 48

Building on the success of the Global Supply Chain Program . . . . 50

Direct support from Team Defence Australia for Australian industry exports . . . 55

Working with the Defence Export Controls Branch . . . . 56

Section 5 – Doing Business with Defence: Cutting Red Tape . . . . 61

Implementing the First Principles Review: Creating One Defence—Defence as a smart buyer . . . . 61

Defence’s commitment to the regulatory reform agenda . . . . 62

Key enablers—striving for excellence in procurement practices . . . . 64

Working with the states, territories and other stakeholders on defence industry matters . . . . 65

Attachment A – Program Information for Key Initiatives . . . . 69

Centre for Defence Industry Capability . . . . 69

Defence Innovation Hub . . . . 71

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` Section 1 – The Defence and

Industry Partnership

Australia’s defence industry—our critical partner

in success

Australia’s defence industry is essential to the operations of the Australian Defence Force (ADF) and to the capability we need to protect Australia and our national interests .

Australia has a number of remarkable world-leading success stories in the development of innovative Defence capability . From development of the high-end, leading-edge phased array radar in Canberra to next-generation protected Hawkei vehicles in Bendigo, Australian industry’s contribution is essential to building Defence capability and ensuring Australia’s national security . Australian industry is already making an important contribution to the development of the F-35A Lightning II Joint Strike Fighter, and many more opportunities are on the horizon for us in that world-leading program .

Based on the direction provided in the 2016 Defence White Paper, Defence must deliver a significant capability modernisation program to build our future ADF . This program will offer exciting new challenges for Australian defence industry to support the delivery of the capability programs the ADF will need to fight and win .

In the next two decades, Australia will embark on one of the most extensive and ambitious shipbuilding programs anywhere in the world to modernise the Royal Australian Navy . On 4 August 2015, the Government announced continuous shipbuilding programs for major surface combatants and minor war vessels . Defence is also conducting a Competitive Evaluation Process for the Future Submarine Program .

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Australian defence

industry

The Australian defence industry employs around 25,000 people, with global defence companies (‘prime companies’) accounting for around 50 per cent of employment in the industry. Over 3000 small to medium enterprises operate in Australian defence industry, mostly as subcontractors to prime companies.

Australian defence industry is located all around the country providing essential capability, services and support to the ADF, making it a truly national enterprise.

A robust partnership between Defence and industry and a highly skilled Australian workforce will be critical if we are to deliver shipbuilding and submarine programs of such national significance .

In addition to the major warfighting capabilities the ADF needs, Australian industry also provides our national Defence support base . This includes delivering the full spectrum of goods and services critical to enabling Defence capability, including logistics services, information and communications technology, health support, fuel, energy and other support .

Close collaboration between Defence and industry is critical to meet the challenges of the future and deliver the Government’s ambitious program of works . The Defence and industry partnership of the future will be instrumental in delivering and supporting the future ADF .

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South Australia

BAE Systems Australia ASC Pty Ltd

For example

PMB Defence (formerly Pacific Marine Batteries) is the

continuous supplier of the Main Storage Battery systems for the

Collins Class submarine . The company also provides engineering,

development and technical services to the Commonwealth of Australia and international customers along with ongoing support to ASC in its platform sustainment role .

Levett Engineering is a precision component manufacturer with

an Australian and international client base that includes the defence, aerospace, medical, electronics and commercial engineering sectors . The company manufactures air frame and engine components for the F-35A Joint Strike Fighter program and also manufactures components for the Collins Class Submarine diesel engine, weapons discharge and periscope assemblies .

Western Australia

Austal

For example

VEEM Ltd is a specialist engineering company manufacturing and

maintaining propellers, valves and other special purpose castings . The company manufactures and maintains the flowserve hull valves for the Collins Class submarines . VEEM also provides major castings to Austal for their US warship program, as well as maintenance support for the Special Air Service Regiment Supacat vehicles .

S2 Wetsuits manufactures personally fitted wetsuits with a high

quality finish for garment durability . S2 Wetsuits supplies custom fitted wetsuits and related garments to Navy divers and ADF special operations personnel .

AVI specialises in the design, supply and service of ruggedised

and deployable networking, communications and observation systems . The company boasts a broad range of in-house design and fabrication expertise and has a proven capacity to rapidly engineer and deliver design changes and develop innovative new solutions .

Australian Defence Industry – Supporting Defence Throughout Australia

Around 3 000 small to medium enterprises (SME) and local businesses support Defence across the country

Defence bases SME clusters

Note: The above diagram provides examples of industry representatives across Australia and is not meant to be an exhaustive list .

WeSTern AuSTrAlIA queenSlAnD norThern TerrITory SouTh AuSTrAlIA neW SouTh WAleS ACT TASmAnIA vICTorIA

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Victoria

John Holland Group Pty Ltd Spotless Group Limited

For example

Australian Defence Apparel (ADA) Pty Ltd has been

manufacturing combat, non-combat and protective apparel and equipment for the ADF for the past 100 years . ADA currently supplies the new Australian Multicam pattern Combat Uniform, Operational Combat Uniform, Soldier Combat Ensemble, and Flyers Ensembles to the ADF .

Sentient Vision Systems specialises in video analysis software,

building solutions which automatically detect small objects with

Tasmania

For example

Taylor Bros is a marine and offshore engineering company

specialising in accommodation solutions for Defence, offshore oil and gas, and general marine applications . The company currently supplies and installs outfit accommodation products for the Hobart Class Air Warfare Destroyers, LHDs, FFGs and replenishment vessels . This includes the supply and installation of galley and accommodation spaces such as modular cabins, modular sanitary spaces, mess areas, sanitary spaces, office spaces, medical spaces, medical equipment installations and meeting rooms .

Delta Hydraulics undertakes design, manufacture and

Australian Capital Territory

Raytheon Australia Pty Ltd Lockheed Martin Australia Pty Limited

For example

CEA Technologies Pty Ltd is an electronic systems company

specialising in the design, development and manufacture of radar and communications technologies . The company holds contracts for the Anzac frigates Anti-Ship Missile Defence Program, the Solid State Continuous Wave Illuminator Transmitter for the Anzac frigates and Radar Development Services for an L, X and S Band Phased Array Radar for the Anzac frigates .

Electro Optic Systems designs, develops and manufactures

advanced remote weapon systems and space sensors for global markets . The company’s space systems sector focuses on the space surveillance and missile defence markets, with products including instruments and sensors to detect, track, classify and characterise objects in space using telescope, laser ablation, optical sensors and satellite detection systems . The company's defence systems sector focuses on remote weapon systems and remote turrets for armoured vehicles .

New South Wales

Thales Australia

Broadspectrum Ltd (BRS) (formerly Transfield Services Limited)

For example

Milspec Manufacturing is a privately owned company providing

vehicle electro-mechanical sub-systems, portable power and alternators . Milspec supplies the Nulka decoy system canister sub-system, as well as vehicle installation kits for light, medium and heavy vehicles .

Bale Defence Industries has a long history of supplying a broad

range of equipment and services to Defence, including special forces equipment, weapon storage systems, weapon mounts, specialized containers and weapon repairs . The company also operates in the maritime sector with the supply of ship furnishings, marine watertight doors and hatches, high and low pressure valves, explosive ordinance lockers, propeller supply and repair, and naval architecture .

Queensland

Airbus Group Australia Pacific Boeing Defence Australia

For example

Micreo Limited is a highly innovative electronics designer and

manufacturer . The company is competing in leading-edge high performance, military grade, microwave and photonic integrated circuits and subsystems . These are critical to radar and electronic warfare avionics systems for use in military aircraft such as the F/A 18 Hornet and Super Hornet and the F-35A Joint Strike Fighter .

TAE is a leading provider of military and commercial turbine engine

maintenance, repair and overhaul services in Australasia . TAE delivers engineering, maintenance and logistics services for the RAAF’s F/A-18 aircraft engines for the Hornet and Super Hornet squadrons . TAE also provides aerospace aluminium vacuum brazing components for the F-35A Joint Strike Fighter Program and recently secured a repair and maintenance contract for the Honeywell AGT1500 Abrams M1A1 Main Battle Tank engine .

Northern Territory

For example

RGM Maintenance Pty Ltd supports the Defence land materiel

maintenance industry sector and is a key supplier of repair, maintenance and overhaul services . They are a regional maintenance support provider for protected and unprotected vehicles on behalf of Australian and international prime contractors, enabling regional and remote ADF units to source consumable materiel products .

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The National

Innovation and

Science Agenda

This Defence Industry Policy Statement complements the Government’s National Innovation and Science Agenda, which is focusing on four priority areas: `culture and capital, to help

businesses embrace risk and incentivise early stage investment in startups `collaboration, to

increase the level of engagement between businesses, universities and the research sector to commercialise ideas and solve problems

`talent and skills, to train Australian students for the jobs of the future and attract the world’s most innovative talent to Australia

`Government as an exemplar, to lead by example in the way Government invests in and uses technology and data to deliver better quality services

The purpose of this Defence Industry

Policy Statement

This 2016 Defence Industry Policy Statement has been

developed following an extensive consultation process during the development of the Defence White Paper.

The consultation process identified the need to develop Defence industry policy to reset and refocus the Defence and industry partnership for improved delivery of Defence capability, to ensure we are maximising opportunities for competitive Australian businesses and streamline the delivery of Defence industry programs .

The key elements and initiatives of the

Defence Industry Policy

The Government’s objective for Defence industry policy is to deliver the Defence capability necessary to achieve the strategy set out in the Defence White Paper, supported by an internationally competitive and innovative Australian defence industrial base .

This Defence Industry Policy Statement is structured in four parts to align with the key elements of the Government’s Defence industry policy:

1 . Delivering Defence capability. A more focused, coordinated and transparent relationship between Defence and industry is required to maximise delivery of Defence capability .

2 . A new approach to Defence innovation. Defence will transform the way it approaches innovation, streamlining

The key elements and initiatives of the Defence Industry Policy

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its engagement with industry and academia, simplifying access to Defence research funding, and creating a seamless link between capability needs, smart ideas and innovation in Australian industry .

3 . Driving competitiveness and export potential. The Government will maximise opportunities for competitive Australian businesses, building export potential, depth of skills and diversification for the Australian defence industry . 4 . Cutting red tape. The Government will streamline tendering and contracting

procedures, and rationalise the industry programs to cut red tape and make it simpler and less costly for Australian industry to support Defence, aligned with implementation of the First Principles Review: Creating One Defence.

This Defence Industry Policy Statement sets out the specific measures the Government will take to implement the Defence industry policy, including:

` streamlining the numerous Defence industry and innovation programs under two broad initiatives funded at around $1 .6 billion1 _{over the decade}

to FY 2025–26:

› establishing a new Centre for Defence Industry Capability, led by an advisory board comprised of private sector and Defence representatives to drive the strategic partnership with Defence, involve industry in governance of the industry programs and provide a range of business and skilling services . The Centre for Defence Industry Capability, and the associated collaborative activities with Defence, will be funded at around $230 million over the decade to FY 2025–26; and

› fostering a new approach to innovation through closer collaboration between Defence, industry and research organisations to jointly develop game-changing innovation and commercialisation opportunities . There will be two streams of funding (described in detail in Section 3 – A New

Approach to Defence Innovation):

• around $730 million (over the decade to FY 2025–26) in a Next Generation Technologies Fund to invest in strategic technologies that have the potential to deliver game-changing capabilities

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• around $640 million (over the decade to FY 2025–26) for a new Defence Innovation Hub to undertake collaborative innovation activities from initial concept, through prototyping and testing to introduction into service

` providing industry an earlier and stronger voice across the capability life cycle, including formally recognising industry as a Fundamental Input to Capability

` developing a more agile capability development and procurement process through implementation of the First Principles Review recommendations

` providing certainty of Government’s investment plans through publication of the

2016 Integrated Investment Program

` evolving the existing Priority and Strategic Industry Capability policy into a Sovereign Industrial Capability Assessment Framework to ensure strategically critical capabilities remain within Australia’s exclusive control, with an improved system for identifying and managing these capabilities .

The initiatives in this Defence Industry Policy Statement, together with the Integrated Investment Program, are designed to provide industry with confidence to invest in the required skills, infrastructure and technologies to support the ADF into the future . Our international and local industry partners will play a critical role in building the new relationship with Defence, delivering world-class capabilities, enhancing Australian industry skills and capabilities and investing in new innovation opportunities . The large defence companies (the primes) will be vital in providing critical linkages to small to medium enterprises, including potential global supply chain opportunities . Defence and the Centre for Defence Industry Capability will also work with the prime companies to help ensure appropriate levels of skilling and technology transfer, and to develop effective processes for exchanging information between Defence and local and international defence industries .

The key elements and initiatives of the Defence Industry Policy

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Issues and business needs Contributions/ great ideas Growth Assurance of supply options ADF Capability A capable, agile and potent ADF

Defence Strategic intent Requirements identification and prioritisation Integrated Investment Program Broader industry Australian industry

The Defence & Industry Partnership

Defence Innovation

Hub Centre for Defence Industry Capability

Capability Realisation

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` Section 2 – Delivering Defence

Capability

Through the Defence White Paper, the Government is aligning strategy, capability and resources to build a more capable, agile and potent future force . The Government’s capability plans for the future force, set out in the Integrated Investment Program, will provide Defence with the ability to develop a broad range of options to respond to the emerging challenges Australia will face in coming decades .

The Government’s commitment to Defence funding will reach two per cent of Australia’s gross domestic product by FY 2020–21 . This funding is a significant long-term investment in Defence’s warfighting equipment and systems, research and development, infrastructure, and the skills and training of our Defence people . This section of the Defence Industry Policy Statement outlines the major initiatives central to realising the Defence and industry partnership and delivering enhanced Defence capability .

Together, these initiatives are designed to provide industry a stronger voice, improve the transparency of Defence’s investment plans, enhance Defence’s identification and management of sovereign industrial capabilities, and ultimately improve the delivery of capability to Defence .

The Centre for Defence Industry Capability

The cornerstone of the Government’s strategy for resetting the Defence-industry partnership is the Centre for Defence Industry Capability (CDIC), which will be co-led by private sector industry and Defence through an advisory board . The purpose of the CDIC is to provide strategic leadership for the sector, and to help build the capability and capacity of Australian industry to support the ADF .

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The CDIC will be funded at approximately $23 million per year, which will be redirected from existing Defence industry programs funding . The CDIC is designed to help transform the Defence and industry relationship, and to fund new industry development, critical skilling and export programs, as well as facilitate access to Defence's new innovation programs for small to medium enterprises .

In consultation with Government, the CDIC will drive the strategic vision for the defence industry sector, building on the capability needs identified in the Integrated Investment Program .

The CDIC will focus on delivering initiatives within three core activities—industry development, facilitating innovation, and business competitiveness and exports .

Industry development

The CDIC will provide business advice and funding for sector-wide initiatives that are focused on developing defence skills and solving defence issues . For example, establishing a Defence business readiness framework to prepare small to medium enterprises seeking to enter the complex Defence business environment . For large-scale Defence projects, the CDIC will work with Defence to prepare and implement industry engagement strategies that recognise the Australian industry capabilities required for Defence .

Facilitating innovation

A new Defence Innovation Portal (the Portal) will be the primary conduit to introduce Australian defence industry to Defence innovation activities . Small to medium enterprises with innovative ideas will be able to present them to Defence through the Portal and will be able to work with the CDIC to realise investment opportunities . Companies will enter the Portal through business .gov .au, and then access

specialist CDIC business and innovation advisers . The Portal’s advisers will provide information about Defence innovation requirements, prepare companies to enter the innovation process, and ensure that company innovation proposals are suitable for funding consideration . More information on Defence innovation is in Section 3 – A

Leadership and management of the CDIC

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Business competitiveness and exports

The CDIC will have expert business advisers able to provide defence-specific business advice to help grow prosperous Australian businesses supporting the ADF . The CDIC will provide development support and funding to assist small to medium enterprises improve their productivity and global competitiveness in areas of specific interest to Defence . Building on the success of the global supply chain program, small to medium enterprises will be able to access a range of export programs and courses through the CDIC . More information on competitiveness and exports is in Section 4 – Driving Competitiveness and Export Potential.

Leadership and management of the CDIC

The CDIC will be a close collaboration between the private sector, Defence and AusIndustry (within the Department of Industry, Innovation and Science) designed to best meet the needs of both industry and Defence .

The CDIC will be led by an advisory board, which will be co-chaired by a senior private sector representative and a senior executive from Defence . Board members will comprise defence industry, Defence and other industry representative

organisations . This approach will bring together the skills and experience of Australian defence industry leaders with senior public sector representatives to provide clear insight into Defence’s capability requirements .

The CDIC services will be delivered through AusIndustry, allowing Defence and industry to draw on the valuable expertise of AusIndustry’s existing service and program delivery infrastructure . The CDIC model will build on the success of the existing Defence Industry Innovation Centre, which will be subsumed into the new centre .

The CDIC will employ highly qualified staff, recruited from the private and public sectors, who possess significant industry experience and skills to provide advice and services to industry across the country . Representatives of the CDIC will be

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located in major state and territory locations, providing the flexibility to engage with industry across Australia .

The CDIC will commence operations in the second half of 2016 . This will see the initial advisory board meetings, provision of business advisory services and commencement of the Defence Innovation Portal .

Additional information in relation to the CDIC and its activities is set out at

Attachment A – Program Information for Key Initiatives.

Representatives from prime companies, small to medium enterprises, industry groups and Defence

Centre leadership (services delivered by AusIndustry)

Facilitation, coordination, integration and grant fund management

Steer and approve strategy, evaluate outcomes and deliver growth projects

Defence co-chair Industry co-chair

Department of

Defence stakeholdersExternal

Centre for Defence Industry Capability (CDIC) Advisory Board Strategic guidance drives Defence capability priorities Stakeholder partnerships and collaborations such as the Advanced Manufacturing Growth Centre, export authorities, State and Territory Governments and industry groups Industry development

Industrial Capability Plan development Defence capability needs Industry capability mapping Capacity/workflow planning Supplier continuous improvement Training needs Facilitate industry development projects Sector based skilling

Innovation portal

Advice regarding commercialisation Providing an insight to the advisory board of small to medium enterprise innovation initiatives

Two way connections to research organisations Facilitate links between the Defence Innovation Hub and Australian industry Guide industry applications into the Defence Innovation Hub

Defence business competitiveness and exports Defence specific business advice, mentoring and development Defence market access advice

Export advice assistance and facilitation Global supply chain development Coordination of trade missions Organisational skilling

Recognising industry as a Fundamental Input to Capability

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Recognising industry as a Fundamental Input

to Capability

Australia’s defence capability edge is based on Defence’s ability to deploy, operate and sustain technologically superior capabilities . Defence achieves this by acquiring advanced technology from international partners, as well as through innovation and indigenous capability development .

For the first time, the Government will formally recognise the vital role of Australian defence industry as a discrete Fundamental Input to Capability . The Fundamental Inputs to Capability are those essential inputs that are combined to achieve capability—reflecting that this requires more than simply purchasing equipment . The current Fundamental Inputs to Capability are: personnel; organisation; collective training; major systems; supplies; facilities and training areas; support; and

command and management .

The recognition of industry as a Fundamental Input to Capability will ensure Defence fully considers the industrial capabilities and the capacity of Australian businesses—micro, small, medium and large—to deliver Defence capability, including operational capabilities and the full spectrum of support functions . The intent behind making industry a Fundamental Input to Capability is to drive more formal consideration of industry impacts through the early stages of the capability development life cycle . In this way, Defence will better match the development of new capabilities with industry’s ability to deliver them . Through this approach, Defence can make more informed recommendations to Government on the role of industry in the acquisition and sustainment of capability, providing more opportunities for Australian industry and ensuring the best capability is delivered to Defence . Defence capability managers will be required to consider and manage industry inputs as they would other Fundamental Inputs to Capability . This means considering the resilience and capacity of industry as capability plans are developed—such as the reliability and health of supply chains . The CDIC will assist capability managers to achieve this new requirement .

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Shipbuilding—an example of industry as a Fundamental

Input to Capability

The Government’s decision on 4 August 2015 to establish a continuous build of naval surface ships is an unprecedented vote of confidence in Australia’s shipbuilding workforce and skills base. It provides industry with the long-term certainty it has needed to secure investment and critical skills and will foster the establishment of a new Defence and industry partnership necessary to deliver this vital Australian industrial capability.

Constructing warships in Australia as part of a continuous building program will consolidate and capitalise upon our long history of shipbuilding success. Ships acquired this way can take advantage of development and experience and perform at the cutting-edge. This strategy will foster a similarly advanced national ship refit and sustainment industry.

This new partnership will be based on a set of robust principles and reforms to allow the future naval shipbuilding industry to be set up on a sustainable, long-term path.

‘This (continuous shipbuilding plan) provides certainty for not just the naval shipbuilding side of things but it also provides certainty for planning, not just within Navy, but within the Australian Defence Force.'

Vice Admiral Tim Barrett, AO, CSC, RAN, Chief of Navy, August 2015

The new capability development process

The Government’s First Principles Review: Creating One Defence—in particular the reform to the capability development, acquisition and sustainment process—is essential to implementing the Government’s plans set out in the Defence White Paper and the Integrated Investment Program.

The Government is implementing an extensive force modernisation program that will bring organisational and cultural opportunities and challenges . This modernisation will introduce new capabilities that require innovative ways of working, particularly as we integrate complex and globally networked systems into the joint force . This

The new capability development process

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includes establishing a single end-to-end capability development function and a strong strategic centre with a robust contestability function .

As part of the First Principles Review, the Defence Materiel Organisation has been dis-established and its core responsibilities for capability delivery have been transferred to the new Capability Acquisition and Sustainment Group with clearer responsibilities and direct lines of accountability . The new Group will work in partnership with defence industry and, together with the CDIC, will ensure the ADF has the necessary capabilities to fulfil its missions and operations .

The Government will revise the current process for approving new capital investment projects to ensure tailored decision-making based on the cost, schedule, technical complexity and overall risk of projects . Through these changes, Defence will be able to adapt the acquisition process to the capability being sought . This will give Defence more agility to work with industry to acquire rapidly evolving technology or take advantage of efficiencies in less complex acquisitions .

Value for money in the capability development process

The Government understands the importance of the value for money concept being clear in the context of Defence capability procurement . The Commonwealth Procurement Rules and Defence procurement policy require procurement officers to take into account a range of issues in considering value for money, including financial and non-financial costs and the quality of goods and services .

Defence capability decisions will continue to seek to achieve the best value for money, based on the Commonwealth Procurement Rules, and include explicit consideration of:

` the sovereign requirements for Australian industry involvement, which would help guarantee the ADF’s independence of action

` the identification of opportunities to maximise internationally competitive Australian industry involvement .

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The First Principles

Review: Creating

One Defence

‘The One Defence transformation is a clear path for Defence to operate with maximum efficiency and effectiveness. It will also allow Defence to establish better and transparent relationships with Government, Ministers, external stakeholders, central agencies, its own leadership and workforce. Most importantly, it will allow Defence to effectively and efficiently deliver on its primary focus: to protect and advance Australia’s strategic interests through the provision of appropriately prepared and equipped armed forces.’

Mr David Peever, Chair—First Principles Review of Defence

In considering Defence capability proposals, the Government will ensure Defence provides comprehensive information in relation to Australian industry issues to ensure informed decisions are made based on the evidence presented .

The Integrated Investment Program

The Government recognises that developing world-leading capabilities is a long-term proposition and is confident Australian industry will invest to meet Defence requirements where there is additional certainty of the Government’s plans .

For the first time, the Government has released an integrated investment program as part of the Defence White Paper package . The Integrated Investment Program brings together all major elements of future investment in Defence capability—from specialist military equipment, through to Defence estate and infrastructure, information and communications technology, and the workforce—to create a comprehensive investment program for Defence . It provides Australian industry with greater certainty on the timing and sequencing of planned approvals to better inform industry planning and guide industry investment .

An integrated approach to investment planning will ensure that key enablers of Defence capability such as wharves, airfields, bases, training ranges, information and communications technology, and a trained uniformed and civilian workforce, are accorded appropriate priority in investment decisions to maximise the effectiveness and sustainability of the force within available resources .

Securing our sovereign industrial capabilities

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What is an industrial

capability in the

Defence context?

An industrial capability is any information or knowledge; technology or technology application; invention or innovation; platform, system or equipment; profession, skill or discipline; that can be provided by Australian industry to enable the ADF to deliver a military effect or for Defence to achieve a Defence capability outcome.

Securing our sovereign industrial

capabilities

There are some capabilities that are so important to Australian Defence missions that they must be developed or supported by Australian industry because overseas sources do not provide the required security or assurances we need . As such, it is critical that the industry base associated with these capabilities is maintained and supported by Defence as sovereign industrial capabilities . The existing Priority and Strategic Industry Capability policy will be replaced by a Sovereign Industrial Capability Assessment Framework to improve the identification and management of the sovereign industrial capabilities that develop and support our ADF capabilities .

Identification of sovereign industrial capabilities will be a collaborative process between Defence and the CDIC . Together, Defence and the CDIC will identify these critical capabilities and utilise the newly developed Sovereign Industrial Capability Assessment Framework to assess industrial elements that support the capabilities .

A Defence Industrial Capability Plan will be created that identifies the sovereign industrial capabilities that are required to be maintained and supported in Australia . Existing contracts and programs that support priority and strategic industry capabilities will continue until a transition takes place to the new sovereign industrial capabilities, scheduled for the second quarter of 2017 .

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Plan Jericho—setting standards in industry planning and

engagement

In early 2015, the Royal Australian Air Force launched Plan Jericho—a plan to transform the Air Force into a more balanced, potent and fully integrated force capable of fighting and winning in the information age.

Together with the complementary initiatives in Army (Plan Beersheba) and Navy (Plan Pelorus), Plan Jericho aims to provide a transformational shift in how Defence as a whole organisation manages strategic planning, creating a culture that values innovative thought and a framework that allows for the flexibility to adapt plans as required.

Industry is fundamental to meet the challenges within Plan Jericho, with Air Marshal Davies, the Chief of Air Force including Defence’s relationship with industry as a key pillar fundamental to ensuring the success of Plan Jericho:

‘Plan Jericho is more than just a vision; it is about transforming our entire force … transforming the way we think; transforming the way we operate; and transforming our relationships with industry.’

Air Marshal Leo Davies, AO, CSC, Chief of Air Force, August 2015

The following criteria, applied collectively, will form the basis of the Sovereign Industrial Capability Assessment Framework:

` protection of intent

` independence of action

` assurance of supply

` essential skills retention

` interoperability limits and benefits

` leveraging competitive advantage .

The concept of a sovereign industrial capability does not mean that all industrial elements must be wholly maintained within government or Defence . Defence envisages that the number of sovereign industrial capabilities will be small, properly

Key enablers that support Defence capability

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targeted and managed . Key examples could include the industrial capabilities underpinning the Nulka active missile decoy system and the CEA phased array radar . This new framework will be designed to operate at two levels in Defence:

` at the strategic level, Defence will provide an improved identification and management plan for sovereign industrial capabilities

` at the individual project investment level, Defence will provide recommendations to Government on sovereign industrial capabilities as part of the Government’s consideration of discrete capital investment proposals .

Key enablers that support Defence capability

Defence recognises the importance of a balanced and integrated approach to investment in new capability and the key enablers—such as wharves, airfields, bases, training ranges, information and communications technology, and a trained uniformed and civilian workforce . The 2016 Defence Industry Policy Statement is aimed at addressing all capabilities of industry, including the key enablers that support Defence .

The Integrated Investment Program outlines an investment of around $195 billion in Defence capability, approximately 25 per cent of which will be spent on key enablers . The large majority of the key enablers investment will be spent in Australia . Defence procurement of these capabilities and services, which includes non-materiel procurement, is extensive in diversity, value, geographical spread and the number of suppliers involved directly or indirectly through the supply chain . The Integrated Investment Program, in accordance with the plans set out in the Defence White Paper, places a high priority on investment in the following specific key enablers:

` developing and maintaining critical infrastructure—including airfields, wharves, port facilities, key ADF bases and logistics systems such as fuel and explosive ordnance facilities

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` providing testing facilities and modern health services that enable ADF training and exercises—including jointly with the United States and others

` investing in information and communications technology that supports Defence business, from peacetime activities through to combat operations .

Future Defence procurement in these areas will focus on the development of strategic partnerships with industry to ensure agile delivery, improved data, management of risks and innovation through longer-term commitments creating stronger, sustained local skill and expertise .

CASE STUDY

Managing fuels

The current fuel management challenge

The provision of fuel is critical for Defence capability . Fuel is the largest single commodity expenditure by Defence . Defence demand constitutes one per cent of total Australian fuel volume and three and a half per cent of aviation fuel volume . Most of this demand is for military specific grades of fuel for which Defence is the only customer . Fuel storage and handling is expensive, complex and potentially hazardous .

Defence fuel usage locations

Key enablers that support Defence capability

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Future options for Defence

Building new Defence owned fuel infrastructure to replace or expand existing facilities may not always be the preferred or value for money solution for Defence . Likewise, preserving the current operating and maintenance model for fuel infrastructure may not always be the best solution . A new approach is needed . First and foremost, Defence will continue to need access to a secure and resilient fuel supply chain that provides the right fuels to a flexible number of locations in scalable volumes to meet capability needs, in a safe, efficient and cost effective manner . Solutions to meet this requirement are potentially very different from the traditional Defence design, build and operate approach . Defence needs to be a smart buyer .

An improved fuels network for Defence capability

Defence is already engaging with industry to identify how to deliver improved fuel network resilience, safety and cost . A consolidated picture of demand covering supply for regular training and operations, as well as increased demand for contingency scenarios, has been developed and shared with industry to enable collaboration and co-design of new fuel supply options . Defence has commenced the use of industry facilities rather than building and operating parallel infrastructure . Recently, in Darwin, rather than investing tens of millions of dollars to replace aged infrastructure, Defence has partnered with industry to provide a more flexible and cost effective solution to supply fuel to Navy . This includes using commercial rather than military specific fuel to take full advantage of the industry supply chain . Similar considerations are occurring in other parts of the Defence fuel supply chain wherever feasible, however one size may not fit all .

Defence stands to gain significant benefits through collaborating with industry to enhance the fuel supply chain—increasing resilience and reducing cost and risk .

29

` Section 3 – A New Approach to

Defence Innovation

Driving Australian innovation is a critical element of the Government’s vision for the nation . The Government’s National Innovation and Science Agenda released on 7 December 2015 will incentivise and reward innovation, entrepreneurship and risk taking .

Defence’s new approach to innovation, described in this section, complements the Government’s broader strategy . The increasing pace of geopolitical, economic and technological change means it is critical that Defence ensure it has continued access to the best innovation Australia has to offer .

Investment in innovation helps to ensure Defence remains resilient to emerging threats, including the possible use of disruptive technologies by adversaries . It also enables us to take advantage of new or developing areas of technology that have the potential to provide a capability edge for Australia’s relatively small force .

Australia benefits from an industrial base consisting of a large number of agile small to medium enterprises strengthened by a vital collection of global companies—with access to global knowledge networks, supply chains networks and export markets . Together our small, medium and large enterprises (along with Australian research institutions and academics) have a track record of producing some of the world’s most innovative defence technologies . However, these enterprises have often found it difficult to engage with Defence due to the fragmented nature of innovation programs and complex entry processes .

The Government is committed to implementing a new approach to Defence innovation that will address these barriers and more effectively access the potential of Australian defence industry to innovate . This new approach will provide greater transparency of Defence needs, seed and nurture innovative technologies and the companies developing them, and develop regulatory and cultural processes to facilitate innovation .

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‘Our operations in

Afghanistan, and elsewhere over recent years, remind us that if we don’t innovate we won’t sustain an advantage over a future adversary–war can be very Darwinian.’ Lieutenant General Angus Campbell, DSC, AM Chief of the Australian Army June 2015

The new approach to Defence innovation

Defence’s new approach to innovation will comprise four key initiatives:

1 . Next Generation Technologies Fund—around $730 million (over the decade to FY 2025–26) will be invested in strategic next generation technologies that have the potential to deliver game-changing capabilities .

2 . Defence Innovation Hub—around $640 million (over the decade to FY 2025–26) will be invested in a new virtual Defence Innovation Hub to enable industry and Defence to undertake collaborative innovation activities throughout the Defence capability life cycle from initial concept, through prototyping and testing to introduction into service . 3 . Defence Innovation Portal—as part of the Centre for

Defence Industry Capability (CDIC), the Portal will facilitate engagement between Defence and innovation activities across Australia . The Portal will provide vital connections between small to medium enterprises and Defence, helping companies understand Defence capability needs and supporting their ability to contribute to Defence innovation requirements . 4 . Changed culture and processes—Defence will change

its culture and business processes to systematically remove barriers to innovation . The first step will be to develop new contracting and intellectual property policies that encourage investment in Australia’s good ideas, keep profits in country, and provide incentives for larger companies to innovate in Australia .

This new approach to Defence innovation takes its direction from Defence’s strategy and policy settings, with priorities driven by

Next Generation Technologies Fund—Defence’s strategic research

31

the new force design process being developed through the First Principles Review . This new approach will involve rigorous governance and oversight of funding recommendations, linking innovation investment to capability priorities .

Defence Driven Priorities

Australian Defence Organisation

Capability and enterprise needs Force

Design TechnologyForesighting

Australia’s Innovation System

 Academia

 Public Research Agencies  Industry

- Small to medium enterprises - Primes

 Industry Growth Centres

Defence Innovation Portal (CDIC) Next Generation Technologies Fund

Defence Innovation Hub

Funded Collaborative Research Programs Funded Collaborative Innovation Programs

Figure 3: Principal elements of Defence innovation

Next Generation Technologies Fund—Defence’s

strategic research

Effective leveraging of science and technology is a significant priority for Defence, given the relatively small size of the Defence and the wide range of operations it must be able to conduct .

History has shown that the most game-changing military capabilities arise from the pursuit of next generation research and technology programs . In Australia, Defence and Australian industry have developed the internationally acclaimed Jindalee operational radar network, the Nulka anti-ship-missile decoy and world-class counter-improvised explosive device systems .

The Government recognises the importance that Defence’s strategic research has for Australia’s future prosperity, both as a nation and in the global market . Through the Integrated Investment Program, the Government will invest around $730 million (over the decade) in new funding to better position Defence to respond to strategic

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challenges and develop the next generation game-changing capabilities of the future . The Defence Science and Technology Group (DST Group) will take the lead role in conducting and integrating research in next generation technologies . The investment priorities for the Next Generation Technologies Fund will be generated via a rigorous but agile process that is regularly reviewed and agreed by Defence's Investment Committee . DST Group will work with Defence stakeholders, industry, academia and allied defence research agencies on technology studies to identify opportunities and potential game-changing technology areas .

Examples of priority areas of work for the Next Generation Technologies Fund, as identified in the Integrated Investment Program, include:

` integrated intelligence, surveillance and reconnaissance

` space capabilities

` enhanced human performance

` medical countermeasure products

` multidisciplinary material sciences

` quantum technologies

` trusted autonomous systems

` cyber

` advanced sensors, hypersonics, and directed energy capabilities .

DST Group will participate in the Defence Innovation Forums (discussed below) to communicate the Next Generation Technologies Fund priorities, explain how industry and academia can partner with Defence on the programs, and present progress on existing activities .

Defence will build collaborative programs with academia, publicly funded research agencies, industry (particularly small to medium enterprises), and our allies to create a vibrant and interlocking research and innovation capability that is focused on driving Defence outcomes .

Next Generation Technologies Fund—Defence’s strategic research

33

Defence will work closely with Government and industry bodies across Australia which are participating in innovation activities . This will provide greater

opportunities for collaboration and leverage the substantial national investment in research and development .

For example, Defence will co-invest in Cooperative Research Centres and Australian Research Council Industry Linkage Programs and continue its support for the national science, technology, engineering and mathematics initiatives . Defence's Investment Committee will have oversight of the Next Generation Technologies Fund . When promising science and technologies have reached a suitable level of maturity, the Investment Committee may approve the project’s transition to the Defence Innovation Hub for the provision of further funding to allow these technologies to develop into operational capabilities .

CASE STUDY

Defence and industry research program success

DST Group and Thales Australia have engaged in a strategic alliance to conduct, share and collaborate on research and development in sonar-related technologies since 1997 . These technologies include fibre laser hydrophones, sonar performance prediction systems and sonar processing and display systems for Australian ships and submarines .

In the early 2000s, DST Group and Thales Australia initiated a collaborative research program into the potential benefits of utilising commercial off-the-shelf computing hardware with custom software to provide improved sonar processing . The program resulted in a suite of software, known as Panorama, which performs real-time sonar data processing and information display for Australian surface combatant sonar systems . The software provided increased situational awareness and enabled the cost-effective replacement of existing obsolescent equipment .

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The Panorama software is the result of a development process in which experimental versions were deployed on Royal Australian Navy surface combatants and operator feedback was used to iteratively evolve the design . The Panorama software has been licensed to Thales Australia which has equipped the Adelaide Class frigates with Panorama to supplement the existing underwater warfare system . With the assistance of existing Defence industry innovation support funding, including the Capability Technology Demonstrator program and the Defence Innovation Realisation Fund, Thales Australia has also integrated the Panorama software into an upgrade of its Spherion sonar system, providing a substantial improvement in capability for Navy’s Anzac Class ships .

The Defence Innovation Hub—turning research

into capability

The new Defence Innovation Hub will be established as a virtual organisation in the second half of 2016 and will manage a portfolio of Defence innovation investments . The Hub will be coordinated from the Defence Strategic Policy and Intelligence Group, and will rationalise and simplify the existing Defence innovation programs into a streamlined program which nurtures and matures proposals through a single innovation pipeline . Funding of around $640 million (over the decade to FY 2025–26) will be redirected from the existing innovation programs to more effectively deliver innovation to Defence .

The portfolio of investments will range from small ‘concept’ exploration projects through to large-scale prototypes, and will introduce innovation solutions across the Defence enterprise—including information and communications technology and intelligence capabilities . The Hub will have a strong virtual presence across the nation, working closely with industry, academic and research institutions, using the networks established by Defence and the CDIC . The Hub will be responsible for:

` clearly articulating Defence capability needs and challenges

The Defence Innovation Hub—turning research into capability

35

` providing the Investment Committee with recommendations on funding priorities for innovation activities

` building collaborative programs with Defence stakeholders and contract management for innovation activities, including supporting the testing and assessment of innovation projects

` championing innovation across Defence .

The virtual Hub will assist Australian companies, and academic and research organisations to assess whether innovations have a Defence application and will provide access to funding to collaboratively mature those ideas . It will be informed by Defence capability priorities identified in the force design process .

The investment of around $640 million over the decade to FY 2025–26, will be directed to Defence’s highest priority capability needs, including urgent operationally driven requirements . Decisions on investment will be based on evidence from operational and technical experts . Defence will consider, prioritise and resource innovation proposals based on alignment with Defence strategy and:

` suitability—to fulfil a priority Defence capability, enterprise or technology challenge

` feasibility—from a technology perspective

` timeliness—ability to deliver capability when it is needed .

Critical to the success of the Hub will be the development of the supporting policies and culture to remove the current barriers in Defence to innovation . New contracting and intellectual property regimes will be established to maximise incentives to innovation and attract investment from a range of local and international sources . Importantly, Defence will develop new approaches to risk, to encourage Defence and industry to embrace risk where necessary to allow innovation to flourish across the Defence enterprise .

Prior to the establishment of the Hub in the second half of 2016, Defence will release more information to industry on the detailed operation of the Hub, including business processes and performance metrics such as expected timeframes for

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The establishment of the Hub within Defence represents a transformational change in the way Defence approaches innovation, bringing together Defence, our academic and industry partners in a more collaborative and effective way .

CASE STUDY

Defence Materials Technology Centre—Linking

Defence with industry and academia

The Defence Materials Technology Centre (DMTC), DST Group, Civmec Pty Ltd (then Forgacs Engineering), the University of Wollongong and the Australian Nuclear Science and Technology Organisation have teamed to improve the quality of welding in naval shipbuilding and therefore improve shipyard

productivity . The work culminated in a National Defence Innovation Award which was presented by Maritime Australia at the Pacific 2015 Conference in Sydney . The development of the novel Tandem Gas Metal Arc Welding method reduces weld induced distortion in ship hull plating . The collaborative project, which commenced in 2011, was focused on addressing a number of weld induced distortion issues associated with the fabrication of the Air Warfare Destroyer modules . The resultant weld method, demonstrated on 5mm plate, eliminated significant amounts of thermal rework whilst potentially increasing the shipyard's productivity and weld quality . The higher residual strength resulting from the improved quality of welds means greater resistance to weapons effects and enhances the structural life of the ship .

Each of the participants in this project brought together unique capabilities to ensure the success of the innovation project . This included numerical modelling of the welding process, evaluating the weld qualities and structural performance, developing a unique prototype welding system and, finally, demonstrating the technique in a shipyard .

DMTC will continue to play an important part in Defence innovation and will support the new Defence innovation Hub through its unique capabilities and networks .

The Defence Innovation Portal—stakeholder engagement and facilitation

37

The Defence Innovation Portal—stakeholder

engagement and facilitation

To help drive the new approach to Defence innovation, the Government will establish a Defence Innovation Portal within the CDIC to ensure we achieve expansive and effective communications into the Australian academic and industrial base . The Portal will provide a key communication bridge between Defence, industry and academia and will be the entry point for ‘new starters’ to engage with Defence’s virtual Innovation Hub . In particular, small to medium enterprises that do not have established Defence relationships will be able to use the Portal to gain an understanding of Defence’s capability needs and to support their ability to contribute to Defence’s requirements .

The Portal will:

` broadcast Defence’s capability and technology challenges, including the Next Generation Technologies Fund, through the business.gov.au online service, as well as through networking and engagement processes

` refer and connect companies via the Portal’s expert innovation advisers to key Defence research and innovation priorities

` convene regular Defence Innovation Forums where Defence will engage with industry, academic and research organisations

` help to facilitate early engagement with the Defence Export Controls Branch in Defence via the strong connections between Defence and the Portal’s business advisers

` assist in developing viable innovation proposals for consideration by the Hub through expert innovation advice

` introduce industry to broader Government innovation initiatives through AusIndustry’s connections in the Department of Industry, Innovation and Science .

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‘A transparent articulation of defence innovation priorities and a clear path-to-capability realisation are key to achieving greater industry R&D investment.' Ian Irving, CEO Northrop Grumman Australia

In line with the Government’s Digital Transformation Agenda, the Innovation Portal will provide essential information online, through the Government’s centralised resource for the business community: business.gov.au . Companies and researchers will also be able to speak directly to expert staff to assist with innovation queries and make connections to the Hub and the services of Defence and the CDIC’s specialist advisers .

As Australia’s national security, science, research and innovation efforts are coordinated by Defence, Defence Innovation Forums will also provide a venue for communicating national security science and innovation priorities . These priorities will be outlined in a future policy statement on Science and Innovation for National Security .

The Defence Innovation Portal—stakeholder engagement and facilitation

39

The Defence Innovation Portal: an illustration

A small Australian business has an innovative idea that has potential for Defence capability . The business connects into the Defence Innovation Portal through business.gov.au—the doorway into the Defence Innovation Hub for 'new starters .'

Once in the Portal, business advisers engage with the company to assess and potentially refine the idea . The advisers examine the opportunities that might be available, assess the idea against Defence needs and identify its competitive advantage . Business advisers in the CDIC may also look at the company itself to assess if it is ready to do business with Defence .

If the idea continues to have potential, the CDIC will help the proposal to mature, with support provided to improve the business’s potential for success if necessary .

Once the initial assessment and feedback process has been provided by the Portal, and if the idea is appropriate for progression, the small Australian business is ready to transition into the Defence Innovation Hub for further concept exploration . If the idea is not deemed appropriate for Defence, there may be potential for it to be transferred to other business advisers in the broader national innovation system through AusIndustry .

Australian Subject Matter Experts Defence Innovation Hub

 Further concept assessment and development  Capability realisation subject to successful concept progression

Centre for Defence Industry Capability Defence Innovation Portal

 Quick assessment of new idea and feedback  Early concept development and alignment

 AusIndustry coaching, training and business support  Early expert advice and relationship facilitator

Innovative idea generated Defence explores promising capability opportunities in the Innovation Hub SME reaches out to Innovation Portal for support

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CASE STUDY

Innovation enhancing survivability

The counter improvised explosive device challenge—

reDWIng Program

Improvised Explosive Devices (IED) are relatively cheap and easy to produce and since 2003 have emerged as the weapon of choice for insurgents in areas of the Middle East, particularly Afghanistan . The global emergence of increasingly violent and extremist ideologies has ensured that usage of IEDs will continue to proliferate throughout the world and evolve as new technologies emerge . IEDs, initiated by radio signals, continue to represent a significant threat to Afghan military, security and police elements . Two systems have been developed by the DST Group to counter this threat under the REDWING Program . This was in direct response to a requirement set by the Defence’s Counter IED Task Force (CIEDTF) to develop a low cost, lightweight and robust family of systems for use by dismounted Afghan forces (GREENGUM) and for fitting to light vehicles (GREYGUM) . Both systems were optimised for the austere operating environment of Afghanistan and require minimal operator training and limited logistic support .

Cutting-edge research and links to other Defence programs

In response to this urgent operational need, DST Group was able to quickly leverage its extensive counter IED experience gained from the development of cutting-edge technologies used in systems which have been in use by the ADF since 2011 . Based on this experience, pre-production prototypes to meet these stringent requirements set by the CIEDTF were developed within a few months .

The Defence Innovation Portal—stakeholder engagement and facilitation

41

Industry engagement

Australian defence industry was engaged early in the project, through Defence’s Australian Military Sales Office (AMSO), in order to facilitate a rapid transition of the prototypes into full manufacturing and subsequent production of the GREENGUM and GREYGUM systems . Five Australian small to medium enterprises were selected and subsequently contracted to participate in the program to meet the demanding schedule . Thanks to the exceptional efforts of these industry partners, Australia was able to begin delivery to Afghanistan of the first of over 100,000 systems within four months of contract signatures . Based on the demonstrated effectiveness of these fielded solutions, AMSO staff in December 2015 successfully negotiated the sale of a further 55,000 systems to Afghanistan .

A new approach to innovation

The counter IED systems delivered under the REDWING Program are a clear illustration of the successful collaboration between Defence and industry to rapidly develop, manufacture and deliver cutting-edge technologies in response to an urgent operational requirement .

This is an exemplar of how the new approach to innovation will function . In particular, it will:

` leverage forward-looking research in key areas offering high impact to Defence

` involve close interactions with operational users

` provide a strong link from the capability need to potential solutions

` include early involvement of Australian defence industry to rapidly transition innovations into fielded capabilities .

43

Competitive

Australian defence

industry base

A competitive Australian defence industry base delivers benefits to national security:

`provides a military capability edge `enables Defence to act

independently

`builds long-term business relationships `develops unique knowledge of Defence needs.

` Section 4 – Driving

Competitiveness and

Export Potential

Agility, innovation and performance are all essential

characteristics of a diversified and sustainable Australian defence industry base . Ensuring value for money in capability acquisition requires Australian defence industry to be competitive and able to perform not just at the local level but also in a global context . Australian industry has already proven its ability to develop innovative niche capabilities for Defence, variants of which are world-leading and are competitive in the global market . However, selling Australian defence capabilities in an export market has not always met with success .

Enabling better access to global markets for Australian companies not only makes economic sense—it makes strategic sense . The Government is committed to promoting internationally competitive Australian business; where barriers to the global economy still exist, collaboration between government and industry will be critical to overcoming these challenges . The strategies described in this section will provide industry with greater opportunity to develop internationally competitive capabilities . The Centre for Defence Industry Capability (CDIC) will work with Australian companies to achieve economies of scale and develop a more robust and diverse industrial base .

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CEA Technologies

Pty Ltd

CEA Technologies Pty Ltd is a medium sized enterprise, based in Canberra.

It specialises in the design, development and manufacture of radar and communications systems for military and civilian applications.

In 2010, the company delivered to the Royal Australian Navy the first 4th generation Active Phased Array Radar to be brought into service anywhere in the world.<